[Federal Register: March 26, 2003 (Volume 68, Number 58)]
[Notices]
[Page 14725-14727]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26mr03-171]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47541; File No. SR-CBOE-2002-67]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change and Amendment No. 1 Thereto by the Chicago Board Options
Exchange, Inc. Amending its Margin Rule 12.3 To Incorporate Security
Futures
March 20, 2003.
On November 1, 2002, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC''), pursuant to section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change amending CBOE Rule 12.3 (``Margin
Requirements'') to incorporate security futures. On November 21, 2002,
the CBOE filed an amendment to the proposed rule change.\3\ The
proposed rule change was published for comment in the Federal Register
on December 16, 2002.\4\ The Commission received no comments on the
proposed rule change. This order approves the proposed rule change, as
amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Madge M. Hamilton, Senior Attorney, CBOE, to
Theodore R. Lazo, Senior Special Counsel, Division of Market
Regulation (``Division''), Commission, dated November 20, 2002
(``Amendment No. 1'').
\4\ Securities and Exchange Act Release No. 46971 (December 9,
2002), 67 FR 77108.
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[[Page 14726]]
I. Description of the Proposed Rule Change
CBOE has proposed to amend its margin rules, in a manner consistent
with the joint margin regulations of the Commission and the Commodity
Futures Trading Commission (``CFTC'') \5\ to incorporate security
futures. Specifically, the proposed rule change adds a new provision
(k) to CBOE Rule 12.3 to address margin for security futures contracts.
Proposed Rule 12.3(k) would: (1) Require the initial and maintenance
margin for security futures contracts to be 20 percent unless an offset
provision provides for a different margin requirement or the positions
are excluded from CBOE Rule 12.3(k); (2) allow for good faith margin of
certain positions in security futures contracts; (3) clarify that
security futures contracts have no value for margin purposes; (4) make
necessary conforming changes to other CBOE margin provisions; and (5)
make some non-substantive changes to CBOE margin rules for consistency
purposes.
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\5\ See Securities Exchange Act Release No. 46292 (August 1,
2002), 67 FR 53146 (August 14, 2002).
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CBOE's proposed margin requirement for security futures contracts
would adopt the applicable provisions of the Joint Regulations of the
SEC and CFTC (``Joint Regulations'').\6\ In particular, CBOE Rule
12.3(k) would require compliance with the security futures contract
margin requirements of the SEC and CFTC, in addition to the Exchange
margin rules and Regulation T of the Federal Reserve Board.
Accordingly, under proposed CBOE Rule 12.3(k)(1), the initial and
maintenance margin requirement for a security futures contract would be
20 percent of the current market value of the contract unless an offset
provision enumerated in 12.3(k) or another rule provided for a
different margin requirement.\7\
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\6\ 17 CFR 242.400 through 242.406 and 17 CFR 41.42 through
41.49.
\7\ The current market value of the contract would be calculated
on a market-to-market basis at the conclusion of each trading day.
Based on the market-to-market value of a security futures contract,
a variation settlement amount could be debited from or credited to a
customer's account balance at the conclusion of the trading day.
These variation settlement entries represent actual cash withdrawals
from, or deposits to, the account that will change its cash balance
in the same way as would any other routine cash withdrawal or
deposit. When account equity is computed, variation settlement
amounts are automatically accounted for in that they can be viewed
as integrated into the cash balance, which is a component of the
formula for computing equity.
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Proposed CBOE Rules 12.3(k)(2) and 12.3(k)(3) would set a time
limit for obtaining required margin by incorporating by reference the
same time frame that the SEC's Net Capital Rule \8\ permits maintenance
margin calls to remain unsatisfied before the member organization must
deduct the maintenance margin deficiency in computing its net capital.
As a result, if a customer did not satisfy an initial or maintenance
margin call on a security futures contract for five days, the proposed
rule change would require the broker or dealer carrying that customer's
security futures positions would be required to take a deduction for
the undermargined customer account when computing its own net capital.
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\8\ 17 CFR 240.15c3-1(c)(2)(xii).
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CBOE Rule 12.3(k)(4) would expressly state that day trading rules
do not apply to security futures contracts. CBOE has noted that the
Joint Regulations do not include a day trading margin requirement.
The proposed rule change includes lower margin requirements for a
security futures contract held in conjunction with an offsetting
position in another security futures contract, an underlying security,
or an option on an underlying security.\9\ Specifically, the proposed
rule change would incorporate the offsets identified in the Federal
Register release announcing the adoption of the Joint Regulations,
except for the offset involving a broad-based index future (No. 17)
because a broad-based index future may not be carried in a securities
account. In addition, the proposed rule change includes a definition of
the term ``underlying basket'' as pertains to security futures
contracts,\10\ which would require that the composition of the basket
match the composition of the index being offset.
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\9\ In some cases only lower maintenance margin levels are
proposed.
\10\ See proposed CBOE Rule 12.3(k)(5)(D).
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The proposed rule change also would amend CBOE Rule 12.3(f)
(``Market-Maker and Specialist Accounts'') to permit options market-
makers to receive good faith margin treatment from a CBOE member for
certain transactions in security futures contracts that are based on
the same underlying security as the options in which they make markets.
In addition, the proposed rule change provides that security futures
contracts that qualify for the ``security futures dealer'' exclusion
from margin under the Joint Regulations \11\ would be subject to margin
that is satisfactory to the member and the carrying broker or dealer.
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\11\ SEC Rule 400(c)(2)(v); CFTC Rule 41.42(c)(2)(v).
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Proposed changes to CBOE Rule 12.5 (``Determination of Value for
Margin Purposes'') would clarify that security futures contracts have
no value for margin purposes. Proposed amendments to CBOE Rule 12.2
(``Time Margin Must Be Obtained'') and CBOE Rule 12.9 (``Meeting Margin
Calls by Liquidation Prohibited'') would clarify that these rules do
not apply to security futures contracts. The proposed rule change would
also make necessary conforming changes to other margin provisions,\12\
and other changes for consistency purposes.
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\12\ See Proposed CBOE Rules 12.3(b), (f)(1)(A) and (D), (2)(A),
(3)(A)(i), (A)(ii), (A)(iii) and (A)(iv), (g)(i), (h), and (i)(2).
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II. Discussion
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange.\13\ In particular, the Commission believes that
the proposed rule change is consistent with the requirements of section
6(b)(5) of the Act,\14\ which requires, among other things, that the
rules of the Exchange be designed to promote just and equitable
principles of trade and, in general, to protect investors and the
public interest.\15\ In addition, the Commission believes that the
proposed rule change is consistent with section 7(c)(2)(B) of the
Act,\16\ which provides, among other things, that the margin
requirements for security futures must preserve the financial integrity
of markets trading security futures, prevent systemic risk, be
consistent with the margin requirements for comparable exchange-traded
options, and provides that the margin levels for security futures may
be no lower than the lowest level of margin, exclusive of premium,
required for any comparable exchange-traded option.
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\13\ 15 U.S.C. 78s(b)(2).
\14\ 15 U.S.C. 78f(b)(5).
\15\ In approving the proposed rule, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\16\ 15 U.S.C. 78g(c)(2)(B).
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The Commission believes that the rule change is generally
consistent with the customer margin rules for security futures adopted
by the Commission and the CFTC. In particular, the Commission notes
that, CBOE's proposed rule change provides that, with respect to
security futures contracts, its members must collect proper and
adequate margin in accordance with the Joint Regulations. As a result,
the proposed rule change requires a minimum margin level of 20% of
current market value for positions in security futures, which the
Commission believes is the minimum margin level necessary to satisfy
the
[[Page 14727]]
requirements of section 7(c)(2)(B) of the Act.
In addition, Rule 403 under the Act \17\ provides that a national
securities exchange may set margin levels lower than 20% of the current
market value of the security future for an offsetting position
involving security futures and related positions, provided that an
exchange's margin levels for offsetting positions meet the criteria set
forth in Section 7(c)(2)(B) of the Act. The offsets proposed by CBOE
are consistent with the strategy-based offsets permitted for comparable
offset positions involving exchange-traded options and therefore
consistent with section 7(c)(2)(B) of the Act.
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\17\ 17 CFR 240.403(b)(2).
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Finally, the Commission believes it is consistent with the Act for
the CBOE to exclude from its margin requirements positions in security
futures contracts carried in a futures account. The Commission believes
that by choosing to exclude such positions from the scope of its rules,
the CBOE has made compliance by members that are subject to regulatory
requirements of several SROs easier.
III. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\18\ that the proposed rule change (SR-CBOE-2002-67), as amended,
is approved.
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\18\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-7228 Filed 3-25-03; 8:45 am]
BILLING CODE 8010-01-P